Will 2024 will be the year the housing market finally becomes unstuck. The answer is sort of…
At long last we finally are set to say goodbye to 2023. This was a year where interest rates went from 6% to briefly topping 8% back in October. Adding to that, many builders worried about the economy scaled back the number of new homes being built. Additionally, millions of homeowners who locked in historic rates near 3% during the pandemic felt little compulsion to sell their homes and consider buying new homes at higher interest rates.
And all of this left buyers with few choices and the homes available continued to climb in price along with interest rates due to the lack of available inventory.
Looking back in a few years I honestly believe we are going to say that 2023 was one of the worst years for real estate, even eclipsing the market crash of 2007. It certainly was bad for most real estate agents. As I have said before, “If you are a real estate agent and there are no homes to sell, you are for all intents and purposes unemployed”.
And that’s not even taking into account the national commission lawsuit and possible pending changes to commission structures.
So, here we are with 2024 right around the corner. Buyers can’t afford to buy, sellers don’t want to sell, mortgage rates are at 20-year highs, and there are extremely few homes available for sale. The market, by most measures, appears to be frozen. Something has to give, right?
Now the question is if 2024 will be the year the housing market finally becomes unstuck. The answer is sort of.
Affordability is expected to improve a bit in the year ahead, according to the leading forecast heading into 2024. At the very least, most economists don’t anticipate the market getting any more painful for buyers who have been grappling with the worst affordability challenges since the early 1980s.
“We’re not going to see a major breakthrough in the logjam that has been the housing market over the last year or so, but 2024 will be a baby step in the right direction,” says Realtor.com Chief Economist Danielle Hale. “It’s going to stop getting worse.”
While the market will stabilize, it’s expected to remain challenging. We predict the following:
- Home prices will remain high.
- Mortgage rates won’t retreat as much as many have hoped.
- Move-in ready homes in desirable areas will remain scarce.
- Exact market specifics will vary greatly by location.
Home prices are expected to fall.
Let’s get right to the good news: Home prices are expected to finally come down in 2024.
But don’t break out the Champagne—or panic—just yet. Prices are expected to tick down only about 1.7%. That’s not enough of a decline to offer most buyers meaningful financial relief. However, in most markets, they don’t need to be up all night worrying that if they don’t buy immediately, it will get more expensive to do so.
The slight reduction will also give incomes a chance to catch up to these high prices. Typically, home prices rose about 6.5% a year from 2013 through 2019. During the COVID-19 pandemic, many buyers couldn’t save fast enough to keep up with increasing prices. The new year will effectively hit the pause button.
“It will be a bit of a break after what have been pretty relentless home price increases,” says Hale. “It’s going to be a big leap forward for buyers’ mental health. Some of the pressure and sense of urgency will start to let up.”
It’s also not a significant enough of a drop to be the reason why sellers don’t list their properties. Those who have owned their homes for a few years have likely accumulated substantial equity as home values spiked.
So even if prices dip, few homeowners will find themselves underwater on their mortgages like what happened during the Great Recession.
“It’s a really minor drop on top of what have been really major price gains over the last decade,” says Hale.
Everybody’s ready for the stalemate in housing to be over, but the pieces aren’t in place for that to happen just yet.
Mortgage rates will retreat a little
Higher mortgage rates have pummeled the housing market like an especially savage MMA fight.
Realtor.com economists predict that mortgage rates, which have declined over the past five weeks, will slide into the 6% territory in 2024. Fannie Mae expects mortgage rates to decline gradually over the next two years, reaching 6.9% for the 30-year mortgage by 2025. At the same time, First American economists noted that mortgage rates will hover in the 6.5% to 7.5% range.
In the past three years, rates have risen from the high 2% to the mid-7% range, according to Freddie Mac data for 30-year fixed-rate mortgages. That’s resulted in the typical mortgage payment more than doubling over the same period.
Unfortunately for buyers, our economists don’t anticipate rates coming back down to the lows seen during the pandemic.
The Realtor.com econ team anticipates rates will average about 6.8% for the year and fall to about 6.5% by year’s end. That’s about eight-tenths of a point lower than rates were last week (7.29%, according to Freddie Mac), but still much higher than the 4% historical average between 2013 and 2019.
“Small changes in rates can drive big changes in your monthly payments, especially when prices are high,” says Hale.
However, rates aren’t likely to fall enough to give the housing market the jolt that it so desperately needs.
Buyers making the national median income in 2024 are expected to spend an average of 34.9% of their earnings on their housing payments, going down to below 30% by year’s end. That’s better than this October, when buyers spent 39%, but still much higher than the 21% they spent between 2016 and 2019.
“Rising mortgage rates have priced a significant number of homebuyers out of the market because they’ve raised the cost of borrowing at a time when home prices are also close to record highs,” says Hale. “The double whammy is too much for many buyers.”
The housing shortage will get even worse.
The largest pain point for many homebuyers in the year ahead (besides how much their bank accounts are squeezed) will be how few homes there are for sale to choose from. Even as it gets a little cheaper to purchase a home, buyers might not find anything they want.
It’s a vicious, self-perpetuating cycle. If homeowners don’t find anything they’re interested in buying, they are more likely to stay put. And that means there are fewer homes available for other buyers.
The number of existing homes for sale is expected to fall by 14% in 2024 compared with this year. (Existing homes exclude new construction.)
The problem is high mortgage rates are prompting many homeowners to stay put. About two-thirds of homeowners with mortgages have rates below 4%; more than 90% have rates that are less than 6%. There is little incentive for these folks to sell, especially when purchasing a new home at a higher rate will cost them so much more each month.
Those who list their homes and purchase new ones generally have to do so because their family situation changes, such as with a new baby or a divorce, or they’re relocating for a new job or retirement.
“We’re talking about moves of necessity for people,” says Hale.
The good news is builders are expected to keep putting up homes. Those numbers aren’t included in the housing inventory drop that Realtor.com predicts. Builders are anticipated to rev up construction by about 0.4% over last year to just under a million new homes. And they’re likely to continue to offer incentives, such as mortgage rate buy-downs, to close deals.
“When buyers go shopping, they’re going to see more new homes,” says Hale.
Home sales will remain low.
Since homeowners won’t be listing many properties and buyers are struggling to afford homes, sales are expected to remain low.
We predict the national number of existing-home sales will increase by just 0.1%, to about 4.07 million homes sold in 2024.
While that might sound impressive during a housing shortage where prices and rates are elevated, it’s a significant tumble from the 5.28 million homes that were traditionally sold annually between 2013 and 2019. And it’s a dramatic drop from the 6.12 million sales in 2021 when the nation was still in the grips of the pandemic and mortgage rates were historically low.
The housing market will remain competitive. Even with rising interest rates and a growing supply of homes, the housing market is still expected to remain competitive in the next few years. This is due to a number of factors, including strong job growth, population growth, and a limited supply of land.
While these trends offer valuable insights into the future of the housing market, there are additional factors that warrant consideration. Let's get into more detail about these trends and make predictions about how they will affect the housing market. The housing market is a crucial component of the US economy, and predicting its future trends and fluctuations can be difficult, especially as external factors can influence the market.
The year 2024 is expected to bring more stability to the housing market after a few years of uncertainty. With mortgage rates declining faster than expected, home prices are likely to remain mostly flat throughout 2024. This will be good news for buyers who have been waiting on the sidelines for a good time to enter the market.
Local Market Predictions:
All real estate is local and while the national trends are instructive, what matters most is what’s expected in your local market.
Looking ahead to the next five years for real estate:
In the next five years, the US housing market is predicted to experience a slowdown, with prices either flat or experiencing a modest decline. According to a report by Zillow, home values are projected to increase by 5.5% over the next year, slower than the 16.9% increase seen in 2021. Zillow predicts that home values will increase by 3.5% in 2023, 3.4% in 2024, 3.3% in 2025, and 3.2% in 2026. The report also notes that the number of homes for sale will continue to be low, putting upward pressure on prices.
According to the U.S. News Housing Market Index, the national housing shortage will continue through the end of the 2020s, making it a seller's market in many regions.
Interest Rates and Inflation The trajectory of the US housing market is closely tied to interest rates and inflation. Significant increases in mortgage rates or high inflation could result in a substantial reduction in housing affordability, potentially dampening demand. Notably, the Federal Reserve aims to orchestrate a “soft landing” to prevent drastic hikes.
Economic Growth plays a pivotal role in determining the health of the housing market. A recession accompanied by significant job losses might trigger defaults and foreclosures, leading to a depreciation in home prices. While some concerns exist, most economists anticipate sluggish growth rather than a severe downturn in 2024.
Buyers Who Left the Market Will Re-Enter
Prospective buyers may have exited the market in 2023 due to the high interest rates. Harris said we are due for a reversal.
“There is a lot of pent-up demand, and I think we are going to see some buyers coming back into the market in 2024,” he said. “I recently spoke with an attorney who reminded me how emotional the whole home-buying process can be. At the end of the day, this is what encourages people to move forward with a purchase when interest rates are at 8%: The individuals who have an emotional connection to a property will make the decision, along with a plan to move forward with a purchase, and refinance if rates drop.”
It Will Be a Good Market for Foreign Buyers
Those who can afford to buy homes without taking out a mortgage will find good deals in 2024.
“With interest rates where they are, there is an opportunity for cash buyers, and in my personal experience, the foreign buyers I work with have been all cash purchasers,” Harris said. “So, there is opportunity here and now for foreign buyers.”
Inventory Will Pick Back Up (In 2025)
2023 was an atypical year in terms of inventory ebbs and flows.
“This year, there was no big influx during the spring and fall seasons like we usually see in real estate,” Harris said. “We are not seeing inventory at the levels we are accustomed to, but going forward in 2025, I believe we’ll see more inventory as people settle into this elevated interest rate environment.”
The Luxury Market Will Continue To Thrive
Even though mortgage rates are high, Harris believes the luxury real estate market will be strong in 2024.
“If rates remain high and there are buyers that have a lot of cash, they will spend it,” he said. “They are not tied to interest rates, so as long as the inventory is there and prices are where they are, the luxury market will continue to do well.”
Supply constraints continue to be a significant factor, with national inventory levels affected by construction delays. Despite this shortage, the market is bolstered by higher prices, although there are expectations of increased construction activity in the near future.
Investor Activity The involvement of institutional investors in purchasing a substantial share of homes in certain markets introduces an element of uncertainty. A potential pullback in investor activity could impact prices, although the extent of their influence is a subject of ongoing debate.
Pandemic-Related Factors Emerging trends such as remote work and urban flight to suburbs, accelerated by the pandemic, may undergo some reversal post-pandemic. This shift could contribute to a slowdown in markets that experienced heightened activity during the pandemic.
Mortgage Credit The state of mortgage credit and lending standards is crucial in assessing the risk of a housing market crash. Unlike pre-2008 conditions, lending standards are currently tighter, with fewer risky products available. This makes the occurrence of a crash triggered by loose credit less likely.
Regional variations play a significant role, with some markets appearing overpriced while others remain relatively affordable. The likelihood of a correction occurring depends on the specific local conditions in each market.
Overall, while projections point towards sluggish price growth, analysts generally believe that robust demand from millennials and low supply levels should act as a deterrent to a nationwide housing market crash in 2024 unless an unexpected severe economic downturn occurs. However, attention is warranted for potentially vulnerable overheated regional markets.
- Wildcard 1: Mortgage Rates
With both mortgage rates and home prices expected to turn the corner in 2024, record high unaffordability will become a thing of the past, though as noted above, the return to normal won’t be accomplished within the year. This prediction hinges on the expectation that inflation will continue to subside, enabling the recent declines in longer-term interest rates to continue. If inflation were to instead see a surprise resurgence, this aspect of the forecast would change, and home sales could slip lower instead of steadying.
- Wildcard 2: Geopolitics
In our forecast for 2023, we cited the risk of geopolitical instability on trade and energy costs as something to watch. In addition to Russia’s ongoing war in Ukraine, instability in the Middle East has not only had a catastrophic human toll, both conflicts have the potential to impact the economic outlook in ways that cannot be fully anticipated.
- Wildcard 3: Domestic Politics: 2024 Elections
In 2020, amid the upheaval of pandemic-era adaptations, many Americans were on the move. We noted that traffic patterns indicated that home shoppers in very traditionally ‘blue’ or Democratic areas were tending to look for homes in markets where voters have more typically voted ‘red’ or Republican. While consumers also reported preferring to live in locations where their political views align with the majority, few actually reported wanting to move for this reason alone.
Posted by Cary W Porter on